The
breakout trading strategy is a well-known forex strategy. In part 1 and 2 we
have seen what breakout trading strategy is and what to look out for if you
want to make this strategy part of your forex trading system.
A breakout
is breaking through resistance or support levels by a specific currency pair.
For example, if the EUR / USD currency / currency pair is at 1.4100 and 1.4130
is seen as a resistance level (difficult to break) then we speak of a breakout
if the EUR / USD exchange breaks through that price.
Not all
breakouts, however, have an equally long life. On a regular basis, the price
does not seem to sustain the run beyond the breakout and fall back. This is
called a false breakout. (also called 'fakeout')
Some Forex
traders do their best trades when the breakout of a currency pair turns out not
to be sustainable. This forex strategy is called breakout fading. Breakout
fading is trading against the breakout. A forex trader who thinks that a
breakout will fail can formulate a set-up (which is a forex set-up) that will
take effect if the breakout does not succeed.
The most simple example of a breakout fading strategy is
to take a position at the moment that the price - after it has first broken
through a resistance or support level - falls back under the former resistance
/ support level.
See for example the graph of the NASDAQ below. The course
first breaks through the red resistance line in a robust way. The price had
also broken through the resistance level before, but not yet so hard
The trader who wants to fade the breakout waits. If the
breakout continues, he has 'bad luck', at least, his set-up does not take
effect and he does not open a position. But if the price falls back under the
former resistance level (which has now actually become the support level), he
will step in. The rate in this case indeed falls and the position is taken.
After an initial upswing, the price falls well below the resistance level and the
trader takes a good profit.
Forex breakout fading strategy is usually the most
effective as short term trading strategy. It can work as a long-term strategy,
but when a price breaks through the resistance on a weekly chart, it usually
says more than when this happens with a 15-minute chart.
Most breakouts fail. This is also logical, because they
are based on resistance / support levels that have not been identified as
resistance / support for nothing. For example, the currency pair has already
struggled on previous occasions to break through the resistance / support
level, whether it is a general, psychological barrier, such as on the Forex at
the EUR / USD for example at a level like 1.4000 , or 1.3500.
The most interesting of breakout fading strategies is
that they actually respond to a hypothesis that has just been confirmed, namely
that the resistance / support proves to be too strong again. Where the real
breakout is only confirmed when he is already on the road, a false breakout can
be determined with greater certainty, because the resistance / support level
turns out to be a bit too big.
Real breakouts can be very lucrative and are therefore -
also because of the simple logic behind them - very popular with many starting
traders. However, many experienced forex traders prefer a breakout fading
strategy, because the entry point is clearer and statistically more often leads
to a successful trade.
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